A small, Chicago-based magnetic picture frame developer’s claims for trade secret misappropriation against a photo album manufacturer will be headed to trial after an Illinois federal district court largely denied the parties’ cross-motions for summary judgment. Puroon, Inc.’s (“Puroon”) founder and CEO, Hyunju Song, developed the “Memory Book,” “an all-in-one convertible photo frame, album, and scrapbook” that included magnetic openings and an “interchangeable outside view.” In 2013, Puroon launched a website displaying the Memory Book and Song attended various trade shows where attendees were able to interact with the product. Song also sent samples of the Memory Book to representatives of certain retailers without requiring them to sign a nondisclosure agreement. Continue Reading Are Mom-and-Pop Companies Treated Differently When it Comes to Abandoning Trade Secrets? A Federal Court in Illinois Says Yes.
The Attorneys General of ten states are investigating fast food franchisors for their alleged use of “no poach” provisions in their franchise agreements, according to a press release by the New Jersey Attorney General’s Office, and as reported by NPR. In a July 9, 2018 letter, the Attorneys General for New Jersey, Massachusetts, California, Washington, D.C., Illinois, Maryland, Minnesota, New York, Oregon, Pennsylvania, and Rhode Island requested information from eight fast food companies about their alleged use of such provisions. The letter states that the Attorneys General “have learned that certain franchise agreements used in our States and the District of Columbia . . . may contain provisions that impact some employees’ ability to obtain higher paying or more attractive positions with a different franchisee.” In other words, the agreements purportedly prohibit one franchisee of a particular brand from hiring employees of another franchisee of the same brand. Continue Reading State Attorneys General Investigate Fast Food Franchisor “No Poach” Agreements
Democratic U.S. Senators Elizabeth Warren (D-MA), Chris Murphy (D-Conn.), and Ron Wyden (D-Ore.) introduced legislation on April 26, 2018, entitled the Workforce Mobility Act (“WMA”). Although the text of the WMA is not yet available, according to various press releases, it would prohibit the use of covenants not to compete nationwide. In Senator Warren’s press release announcing her co-sponsorship of the bill, Senator Warren stated that “[t]hese clauses reduce worker bargaining power, stifle competition and innovation, and hurt Americans striving for better opportunities. I’m glad to join Senator Murphy to put an end to these anti-worker, anti-market agreements.” Continue Reading Democratic U.S. Senators Seek to Abolish Non-Compete Agreements
Illinois is one of several jurisdictions that recognizes the authority of courts to blue pencil or judicially modify otherwise unenforceable restrictive covenants to be enforceable. See, e.g. Weitekamp v. Lane, 250 Ill. App. 3d 1017, 1028, 620 N.E.2d 454, 462 (4th Dist. 1993) (affirming judicial modification of 300-mile non-compete to specific county); Arpac Corp. v. Murray, 226 Ill. App. 3d 65, 80, 589 N.E.2d 640, 652 (1st Dist. 1992) (affirming the circuit court’s modification of restrictive covenant when it was modified “only slightly” and holding that the balance of the restrictions were reasonable and necessary to protect Arpac’s legitimate business interests).
Recent reported decisions, however, cast doubt on the availability of judicial modification in all but exceedingly limited circumstances. In the past three years, only a handful of cases even mentioned judicial modification and, of those cases, not one actually modified, or affirmed the modification of, an otherwise unenforceable covenant. See AssuredPartners, Inc. v. Schmitt, 2015 IL App (1st) 141863, ¶ 52 (2015) (refusing to modify restrictive covenants because “deficiencies too great to permit modification”); Bankers Life & Cas. Co. v. Miller, No. 14 CV 3165, 2015 WL 515965, at *3 (N.D. Ill. Feb. 6, 2015) (deciding choice of law, noting that “Illinois courts are circumspect in their modification” and that “Illinois courts look skeptically at modifications, and may modify covenants only after ensuring that fairness is not harmed”); Fleetwood Packaging v. Hein, No. 14 C 9670, 2014 WL 7146439, at *9 n.7 (N.D. Ill. Dec. 15, 2014) (rejecting a proposed modification that would a create a durational limitation where none existed before, noting that “[e]ven when courts have found judicial reformation to be warranted, the challenged restrictive covenants needed only slight modification to become reasonable”). Continue Reading Illinois Employers Should Not Depend on Blue Penciling to Enforce Restrictive Covenants
On May 11, 2017, a Northern District of Illinois federal court ruled that a Plaintiff properly alleged misappropriation under both the federal Defend Trade Secrets Act (DTSA) and the Illinois Trade Secrets Act (ITSA) in a case where the employee downloaded files onto a personal thumb drive and then went to a competitor.
Plaintiff Molon Motor and Coil Corporation (“Molon”) contended that its former Head of Quality Control, Manish Desai, downloaded confidential data onto a portable data drive before leaving Molon for a competitor, Nidec Motor Corporation (“Nidec”). Molon further contended that Desai provided the confidential data to Nidec and Nidec then used (and continues to use) the confidential data to compete with Molon. Nidec filed a Motion to Dismiss Molon’s Complaint against Nidec (Molon did not sue Desai) on the basis that Molon could not state a claim under the DTSA or the ITSA because a) Desai downloaded the trade secrets while still employed by Molon, and b) Molon did not make a plausible allegation that Nidec used the trade secrets. Continue Reading Illinois Federal Court Allows Inevitable Disclosure Theory in Defend Trade Secrets Act Case
Three very recent decisions reflect the irreconcilable division of judicial authority regarding the adequacy of at-will employment as the sole consideration for an otherwise valid non-compete. Compare (a) Standard Register Co. v. Keala, No. 14-00291 (D. Haw., June 8, 2015) (adequate under Hawaii law) (“majority rule”), with (b) Hunn v. Dan Wilson Homes, Inc., Nos. 13-11297 and 14-10365 (5th Cir., June 15, 2015) (inadequate under Texas law) (“minority rule”), with (c) McInnis v. OAG Motorcycle Ventures, Inc., 2015 IL App. (1st) 130097 (June 25, 2015) (2-1 ruling based on the Fifield rule) (“middle ground”).
Status of the Standard Register case. Several at-will employees of Standard, a distributor of promotional marketing products, executed non-competes and then resigned and went to work for an alleged competitor. Standard sued them. Judge Seabright bifurcated and decided the adequacy-of-consideration issue. Although the non-competes contained an Ohio choice-of-law provision (Standard is an Ohio corporation), he held that Hawaii had the most significant relationship to the parties and the dispute. So, Hawaii law applied.
Hawaii’s Supreme Court has not decided whether, under that state’s law, “continuing at-will employment is, by itself, sufficient consideration for an otherwise reasonable non-competition agreement entered into during a term of employment (and not at the beginning of employment).” Judge Seabright observed that courts in several states hold that consideration in such a situation is insufficient, but “the clear majority position is to the contrary.” The court concluded that “the Hawaii Supreme Court would not require additional consideration beyond continuing at-will employment.”
Status of the Hunn case. Texas Bus. & Com. Code § 15.50(a), provides that “a covenant not to compete is enforceable if it is ancillary to or part of an otherwise enforceable agreement at the time the agreement is made.” Lack, an at-will employee of Hunn’s architectural design company, signed a non-compete. Lack transferred to his home computer from the company’s computer a copy of confidential plans and specifications relating to a project on which Lack was working for a client of Hunn’s (the company permitted employees to take files home to work on them). Then, Lack resigned, was hired by the client, and allegedly used the files to complete the project. Hunn sued Lack for breach of the non-compete, violating the Computer Fraud and Abuse Act, and unlawfully disclosing the company’s confidential information to Hunn’s client.
The Fifth Circuit held that a contract for at-will employment does not qualify as “an otherwise enforceable agreement” under the Texas statute “because the promise of continued employment in an at-will contract is illusory — neither the employer or employee is bound in any way.” Therefore, the non-compete lacked consideration and was unenforceable under Texas law. That court also rejected Hunn’s other claims (see below).
Status of the McInnis case. For three years, McInnis was an employee of OAG, selling Harley-Davison motorcycles. He quit OAG and went to work for a competitor for one day. He then returned to OAG which required him to sign a non-compete and confidentiality agreement as a condition of his re-employment. He resigned 18 months later and resumed employment with the competitor. OAG sued and sought an injunction. It was denied on the ground that the covenant lacked adequate consideration because he was an at-will employee employed for less than two years. A scathing dissent challenged the majority’s rationale.
The conflict among the states.
The majority position: According to Judge Seabright in Standard Register, courts in Maryland, Ohio, Vermont, and Wisconsin reason that an employer’s forbearance in exercising a legal right — here, not terminating an at-will employee — is valid consideration for a non-competition covenant and is not illusory. Further, he referenced the Restatement Third of Employment Law (April 2014 Proposed Final Draft), § 8.06 comment e, and Reporters’ Notes. Comment e asserts that “Continuing employment of an at-will employee is generally sufficient consideration to support the enforcement of an otherwise valid restrictive covenant.” The Reporters’ Notes to comment e cite rulings to this effect by courts in more than 20 states.
The minority position: Citing cases from Minnesota, South Carolina, and Washington, Judge Seabright said that several jurisdictions hold that “continued at-will employment, standing alone, is insufficient consideration for a non-competition agreement entered into during current employment.” He said that the Restatement Third of Employment Law identifies six jurisdictions, besides those three, that concur with the minority view.
Middle ground: According to Judge Seabright, the Restatement identifies eight states — including Illinois — that endorse a middle ground, namely, that consideration is sufficient only if the employee is retained for a substantial period after the non-compete is signed. A leading Illinois case (there is no Supreme Court decision directly on point) is Fifield v. Premier Dealer Services, Inc., 2013 Ill. App. (1st) 120327, holding that continuous employment for two years or more constitutes reasonable consideration for a restrictive covenant. The majority in McGinnis followed that ruling.
Justice Ellis, dissenting, rejected as indefensible a bright-line two-year rule. He insisted that a determination of the adequacy of consideration requires a case-by-case analysis in order to protect “at-will employees from the whim of the employer.” Here, in his view, it was relevant that McGinnis signed the covenant at the time he was hired, that the period of McGinnis’s post-covenant employment (18 months) was substantial, and that he left OAG voluntarily. The jurist said he could understand the term “additional consideration” in the instance of an existing employee but questioned the logic of requiring “additional compensation” — additional to what? — for a newly hired employee. He also noted that three of the four federal judges deciding post-Fifield cases predicted that the Illinois Supreme Court would reject the bright-line rule.
Two other issues in Hunn.
CFAA. One count of Hunn’s complaint against Lack accused him of violating the Computer Fraud and Abuse Act. The appellate tribunal held that since Lack was employed by Hunn when he transferred the files to his home computer, and since employees were permitted to transfer files to their home computers, Lack did not exceed authorized computer access. Therefore, there was no CFAA violation.
Disclosure of trade secrets and other confidential information. Hunn accused Lack of post-employment disclosure of Hunn’s confidential plans and specifications. But the Fifth Circuit disagreed because the plans had been disclosed to the client with Hunn’s consent — through its agent, Lack — during Lack’s employment by Hunn.
- Consideration. Determination of the sufficiency of consideration for a non-compete executed by an at-will employee may turn on which state’s law applies. If the relevant facts and circumstances permit, an employer should include a choice-of-law provision designating the law of a state where at-will employment is adequate consideration. However, as the Hunn case illustrates, choice-of-law clauses are not always honored.
- Confidential information. An employer who gives employees access to confidential information should require them to sign written commitments (a) to return or delete the information promptly after termination of employment, and (b) under no circumstances to use or disclose the information other than in furtherance of the employer’s business.
In Illinois federal court, a plaintiff alleged aspects of their LinkedIn group were trade secrets misappropriated by the defendant. The defendant moved to dismiss for failure to state a claim. The court denied the motion in part and granted in part, ruling that portions of social media groups may be protectable under the state’s trade secret law. CDM Media USA, Inc. v. Simms, Case No. 14-cv-9111 (N.D. Il., Mar. 25, 2015) (Shah, J.).
Summary of the case. This case concerns the ownership rights to private social media groups. The plaintiff, CDM Media USA, created a private LinkedIn group for CIOs and other IT executives interested in CDM events. The defendant, Robert Simms, was the point person for this group while he was employed at CDM. When Simms resigned from CDM, he allegedly refused to return the group’s membership list and communications to CDM and later allegedly used the materials to compete against CDM by attempting to solicit CDM’s current and potential customers and vendors. CDM filed suit alleging, among other things, violation of the Illinois Trade Secrets Act. Simms filed a motion to dismiss for failure to state a claim. The court denied the motion with respect to the group’s membership list but granted the motion with respect to “confidential information” contained in the group.
Legal standards under the Illinois Trade Secrets Act. A claim under the Illinois Trade Secrets Act requires the plaintiff allege (1) they have a trade secret (2) that was misappropriated (3) using the defendant’s business. “Trade secret” under the act requires the information sought to be protection derive economic value from its secrecy and that the information be subject to reasonable efforts of secrecy and confidentiality.
The Court’s ruling. Regarding the group’s membership list, the Court denied the motion to dismiss stating there was too little known about the contents, etc. of the group at the present stage of litigation to rule on the issue as a matter of law, without further factual inquiry. However, the Court granted the motion to dismiss regarding the “confidential information” contained in the group stating CDM’s blanket allegations, i.e., that the LinkedIn group contained confidential information, were insufficient. According to the Court, the plaintiff must allege certain messages or classes of messages contain trade secrets and what it is about the messages that satisfy the trade secrets definition.
Takeaways. Whether or not membership lists of private social media groups are protectable under Illinois trade secret law will likely depend on the privacy/confidentiality measures employed to protect to information and whether the information economic value from its secrecy. Regardless, it is safe to say that in no circumstances will a public group’s membership list be protectable because they lack a fundamental tenet of trade secret law, i.e., the information must be “secret.” Moreover, information contained within a private social media group, such as messages, may be protectable. However, for protection to exist, information within the group desired to be protected must be identified with some specificity and have independent economic value. For more on this topic, please join us for today’s webinar Employee Social Networking: Protecting Your Trade Secrets in Social Media
A Chicago federal judge denied summary judgment to an employer alleged to have misappropriated and converted a subordinate’s trade secrets. Stevens v. Interactive Financial Advisors, Inc., Case No. 11 C 2223 (N.D. Ill., Feb. 24, 2015) (Kennelly, J.).
Summary of the case. After 20 years as a licensed insurance broker, Stevens wanted to provide investment advisory services as well. However, he was not a registered investment advisor, and so he affiliated with Interactive which was registered. Stevens uploaded his insurance client and investment customer information — which he considered to be his trade secrets — to the electronic database of Redtail, a technology company also used by Interactive. When Interactive subsequently terminated Stevens’ affiliation, it reassigned his customers to two other Interactive advisors and directed Redtail to block his access to his client and customer information. Stevens sued, charging Interactive and Redtail with trade secret misappropriation and conversion. The court granted the defendants’ summary judgment motion as to Stevens’ investment customers but denied it with regard to his insurance clients.
Stevens’ relationship with Redtail. Although Stevens apparently had no written agreement with Redtail, he considered their relationship to be contractual. He paid Redtail for its services relating to his client and customer information.
Termination of Stevens. In year six of Stevens’ association with Interactive, the firm accused him of involvement in a Ponzi scheme and terminated his affiliation. After he was terminated, he still could provide services to his insurance clients but not to his reassigned investment customers.
The litigation. Stevens’ federal court complaint was based on diversity jurisdiction. He alleged that both by blocking access to his data base and by granting such access to other advisors, Interactive and Redtail misappropriated his trade secrets in violation of the Illinois Trade Secrets Act, converted his property, and committed other torts.
The court’s decision on the defendants’ motions for summary judgment.
- Investment customers. Judge Kennelly observed that, as a result of the termination, Stevens no longer was affiliated with a registered securities advisor and, thus, could not legally service his investment customers. Interactive had to reassign them. Moreover, federal regulations and Interactive’s own policies provided that a terminated representative ceased to have a right of access to his investment customers’ non-public personal information. The defendants were entitled to summary judgment, the judge concluded, with regard to Stevens’ claims of misappropriation and conversion of his investment customers’ information because no material issues were in dispute.
- Insurance clients. Material facts were in dispute, according to Judge Kennelly, concerning Stevens’ allegations of misappropriation and conversion of information relating to his insurance clients, and a reasonable jury could agree with Stevens that he owned that information, that it constituted a trade secret, and that Interactive misappropriated and converted it.
Further, the court ruled that a reasonable jury could find that Redtail acted as Interactive’s agent by blocking Stevens’ access to the data base and granting access to others designated by Interactive. According to the judge, if Redtail assisted Interactive in committing torts, Redtail could be held jointly and severally liable with Interactive. In addition, there was a genuine dispute relating to the existence and terms of a contractual relationship Stevens contended that he had with Redtail, and as to the duties Redtail owed to him. For these reasons, Redtail’s motion for summary judgment as to Stevens’ claims of misappropriation and conversion of his insurance clients’ information was denied.
Takeaways. Several judicial opinions state in dicta that employers rarely are sued for conversion and trade secret misappropriation. The case of Stevens v. Interactive is one of those rare lawsuits. Judge Kennelly’s decision illustrates that — like anyone else — an employer who takes and uses someone else’s property without permission risks being sued for conversion. Further, if that property constitutes a trade secret, the employer also may be accused of misappropriation. To be sure, Stevens was an independent contractor, not an Interactive employee, but nothing in the court’s opinion suggests that the ruling turned on that distinction.
As part of our annual tradition, we are pleased to present our discussion of the top 10 developments/headlines in trade secret, computer fraud, and non-compete law for 2013. Please join us for our complimentary webinar on March 6, 2014, at 10:00 a.m. P.S.T., where we will discuss them in greater detail. As with all of our other webinars (including the 12 installments in our 2013 Trade Secrets webinar series), this webinar will be recorded and later uploaded to our Trading Secrets blog to view at your convenience.
Last year we predicted that social media would continue to generate disputes in trade secret, computer fraud, and non-compete law, as well as in privacy law. 2013 did not disappoint with significant social media decisions involving the ownership of social media accounts and “followers” and “connections,” as well as cases addressing liability or consequences for actions taken on social media, such as updating one’s status, communicating with “restricted” connections, creating fake social media accounts, or deleting one’s account during pending litigation.
We also saw more states (e.g., Arkansas, Utah, New Mexico, California, Colorado, Nevada, Michigan, New Jersey, Oregon, and Washington) enact legislation to protect employees’ “personal” social media accounts and we expect more states to follow.
The circuit split regarding the interpretation of what is unlawful access under the Computer Fraud and Abuse Act (“CFAA”) remains unresolved and another case will need to make its way up to the Supreme Court or legislation passed to clarify its scope as federal courts continue to reach differing results concerning whether employees can be held liable under for violating computer use or access policies.
There have also been several legislative efforts to modify trade secret, computer fraud, or non-compete law in various jurisdictions. Texas adopted a version of the Uniform Trade Secrets Act, leaving Massachusetts and New York as the lone holdouts. Oklahoma passed legislation expressly permitting employee non-solicit agreements. Massachusetts, Michigan, Illinois, New Jersey, Maryland, Minnesota, and Connecticut considered bills that would provide certain limitations on non-compete agreements but they were not adopted.
We expect more legislative activity in 2014, particularly regarding privacy, the scope of the CFAA, and trade secret legislation to curb foreign trade secret theft and cyber-attacks.
Finally, while the Snowden kerfuffle and NSA snooping captured the headlines in 2013, government agencies remained active, including some high profile prosecutions under the Economic Espionage Act, the release of the Obama Administration’s Strategy on Mitigating the Theft of U.S. Trade Secrets, and the National Labor Relations Board’s continued scrutiny of employers’ social media policies. We expect more government activity in this space in 2014.
Here is our listing of top developments/headlines in trade secret, computer fraud, and non-compete law for 2013 in no particular order:
1) Dust Off Those Agreements . . . Significant New Non-Compete Cases Keep Employers On Their Toes
Employers were kept on their toes with some significant non-compete decisions which forced some employers to update their agreements and onboarding/exiting practices. First, in Fifield v. Premier Dealer Services, an Illinois appellate court found that less than two years employment is inadequate consideration to enforce a non-compete against an at-will employee where no other consideration was given for the non-compete. Second, in Dawson v. Ameritox, an Alabama federal court found that a non-compete executed prior to employment was unenforceable. Next, in Corporate Tech. v. Hartnett, a Massachusetts federal court held that initiating contact was not necessary for finding solicitation in breach of a customer non-solicitation agreement. Lastly, in Assurance Data v. Malyevac, the Virginia Supreme Court found that a demurrer (i.e., a pleading challenge) should not be used to determine the enforceability of non-compete provisions but rather evidence should be introduced before making such a determination.
2) Continued Split of Authority On the Computer Fraud and Abuse Act and Efforts to Reform CFAA and Enhance Federal Trade Secret and Cybersecurity Law
Courts in Massachusetts, Minnesota, and New York joined the Ninth Circuit’s narrow reading of the CFAA and limited its applicability to pure hacking scenarios rather violations of employer computer usage or access policies. Additionally, in 2013, Representative Zoe Lofgren introduced Aaron’s Law, named after the political hackvist Aaron Swartz, to reform of the Computer Fraud and Abuse Act. Her proposed legislation would limit the CFAA to pure hacking scenarios and exclude violations of computer usage policies and internet terms of service from its scope. Lofgren also introduced legislation which would create a federal civil cause of action in federal court for trade secret misappropriation. Other legislation to prevent intellectual property theft was also introduced including the Deter Cyber Theft Act, which aims to block products that contain intellectual property stolen from U.S. companies by foreign countries from being sold in the United States. The Cyber Economic Espionage Accountability Act was also introduced and allows U.S. authorities to “punish criminals backed by China, Russia or other foreign governments for cyberspying and theft.” We expect Congress to consider similar legislation in 2014.
3) Texas Adopts Uniform Trade Secrets Act
Texas joined forty-seven other states in adopting some version of the Uniform Trade Secrets Act. Until recently, Texas common law governed misappropriation of trade secrets lawsuits in Texas. The new changes under the Texas UTSA (which we discuss in more detail here) provide protection for customer lists, the ability to recover attorneys’ fees, a presumption in favor of granting protective orders to preserve the secrecy of trade secrets during pending litigation, and that information obtained by reverse engineering does not meet the definition of a trade secret. Legislation has been introduced in Massachusetts to adopt the Act but has yet to pass. For additional information on recent trade secret and non-compete legislative updates, check out our webinar “Trade Secrets and Non-Compete Legislative Update.”
4) High Profile Prosecutions and Trials under Computer Fraud and Abuse Act and Economic Espionage Act
2013 saw several high profile prosecutions and trials under the CFAA and Economic Espionage Act. Bradley Manning, who allegedly leaked confidential government documents, to WikiLeaks, and Andrew ‘Weev’ Auernheimer, who allegedly hacked AT&T’s servers, were both convicted under the CFAA. Executive recruiter David Nosal was convicted by a San Francisco jury of violating federal trade secret laws and the CFAA and sentenced to one year and a day in federal prison. In U.S v. Jin, the Seventh Circuit upheld the conviction of a Chicago woman sentenced to four years in prison for stealing trade secrets of her employer before boarding a plane for China. For additional information on criminal liability for trade secret misappropriation, check out our webinar “The Stakes Just Got Higher: Criminal Prosecution of Trade Secret Misappropriation.”
5) More Social Media Privacy Legislation
Arkansas, Utah, New Mexico, Colorado, Nevada, Michigan, New Jersey, Oregon, and Washington all passed legislation social media privacy legislation in 2013 that prohibited employers from asking or insisting that their employees provide access to their personal social networking accounts. California extended its current social media privacy law to specify that it encompassed public employers. We expect more states to enact social media privacy legislation in 2014.
6) Continued Uncertainty on the Scope of Trade Secret Preemption
Courts have continued struggled with the scope and timing of applying preemption in trade secret cases but there is a growing movement to displace common law tort claims for the theft of information. Such claims are typically tortious interference with contract, conversion, unfair competition, and breach of fiduciary duty. In essence, plaintiffs may only be left with breach of contract and a trade secret claim for the theft of information if a jurisdiction has adopted a broad preemption perspective. Courts in western states such as Arizona, Hawaii, Nevada, Utah, and Washington have preempted “confidential information” theft claims under their respective trade secret preemption statutes.
In K.F. Jacobsen v. Gaylor, an Oregon federal court, however, found that a conversion claim for theft of confidential information was not preempted. In Triage Consulting Group v. IMA, a Pennsylvania federal court permitted the pleading of preempted claims in the alternative. Additionally, in Angelica Textile Svcs. v. Park, a California Court of Appeal found that there was no preemption of claims for breach of contract, unfair competition, conversion, or tortious interference because the claims were based on facts distinct from the trade secret claim and the conversion claim asserted the theft of tangible documents. In contrast, in Anheuser-Busch v. Clark, a California federal court found that a return of personal property claim based on the taking of “confidential, proprietary, and/or trade secret information” was preempted because there was no other basis beside trade secrets law for a property right in the taken information. For additional information on the practical impact of preemption on protecting trade secrets and litigating trade secret cases, check out our webinar “How and Why California is Different When it Comes to Trade Secrets and Non-Competes.”
7) Growing Challenge of Protecting of Information in the Cloud with Increasing Prevalence of BYOD and Online Storage
While the benefits of cloud computing are well documented, the growth of third party online data storage has facilitated the ability for rogue employees to take valuable trade secrets and other proprietary company electronic files, in the matter of minutes, if not seconds. The increasing use of mobile devices and cloud technologies by companies both large and small is likely to result in more mobile devices and online storage being relevant in litigation. A recent article in The Recorder entitled “Trade Secrets Spat Center on Cloud,” observed that the existence of cloud computing services within the workplace makes it “harder for companies to distinguish true data breaches from false alarms.”
An insightful Symantec/Ponemon study on employees’ beliefs about IP and data theft was released in 2013. It surveyed 3,317 employees in 6 countries (U.S., U.K., France, Brazil, China, South Korea). According to the survey, 1 in 3 employees move work files to file sharing apps (e.g. Drop Box). Half of employees who left/lost their jobs kept confidential information 40% plan to use confidential information at new job. The top reasons employees believe data theft acceptable: (1) does not harm the company does not strictly enforce its policies; (2) information is not secured and generally available; or (3) employee would not receive any economic gain. The results of this study serve as a reminder that employers must be vigilant to ensure that they have robust agreements and policies with their employees as well as other sound trade secret protections, including employee training and IT security, to protect their valuable trade secrets and company data before they are compromised and stolen. Employers should implement policies and agreements to restrict or clarify the use of cloud computing services for storing and sharing company data by employees. Some employers may prefer to simply block all access to such cloud computing services and document the same in their policies and agreements. For a further discussion about steps and responses companies can take when their confidential information and/or trade secrets appear, or are threatened to appear, on the Internet, check out our webinar “My Company’s Confidential Information is Posted on the Internet! What Can I Do?”
8) Continued Significance of Choice of Law and Forum Selection Provisions In Non-Compete and Trade Secret Disputes
The U.S. Supreme Court’s recent decision in Atlantic Marine v. U.S.D.C. for the W.D. of Texas appears to strengthen the enforceability of forum selection clauses as it held that courts should ordinarily transfer cases pursuant to applicable and enforceable forum selection clauses in all but the most extraordinary circumstances. While Atlantic Marine did not concern restrictive covenant agreements or the employer-employee context, it may nonetheless make it more difficult for current and/or former employees to circumvent the forum selection clauses contained in their non-compete or trade secret protection agreements. Many federal courts continue to enforce out-of-state forum selection clauses in non-compete disputes (see AJZN v. Yu and Meras Eng’r’g v. CH2O), while some courts have disregarded forum selection clauses in such disputes “in the interests of justice.” The Federal Circuit in Convolve and MIT v. Compaq and Seagate, held that information at issue lost its trade secret protection when the trade secret holder disclosed the information because it failed to comply with the confidential marking requirement set forth in a non-disclosure agreement. Accordingly, trade secret holders should be careful what their non-disclosure agreements say about trade secret protection otherwise they may lose such protection if they fail to follow such agreements.
9) Social Media Continues to Change Traditional Legal Definitions and Analyses
Social media continues to change the way we define various activities in employment, litigation, and our everyday lives. A Pennsylvania federal district court in the closely watched Eagle v. Morgan case found that a former employee was able to successfully prove her causes of action against her former employer for the theft of her LinkedIn account, but she was unable to prove damages with reasonable certainty. Recent cases in Massachusetts and Oklahoma held that social media posts, updates and communications with former customers did not violate their non-solicitation restrictive covenants with their former employer. In the litigation context, a New Jersey federal court issued sanctions against a litigant for deleting his Facebook profile, while a New York federal court allowed the FTC to effectuate service of process on foreign defendants through Facebook. The Fourth Circuit held that “liking” something on Facebook is “a form of free speech protected by the First Amendment.” Federal district courts in Nevada and New Jersey illustrated the growing trend of courts finding that individuals may lack a reasonable expectation of privacy in social media posts. For further discussion on the relationship between social media and trade secrets, check out our webinar “Employee Privacy and Social Networking: Can Your Trade Secret Survive?”
10) ITC Remains Attractive Forum to Address Trade Secret Theft
The Federal Circuit caught the attention of the ITC and trade secret litigators alike when it ruled in TianRui Group Co. v. ITC that the ITC can exercise its jurisdiction over acts of misappropriation occurring entirely in China. Since then, victims of trade secret theft by foreign entities are increasingly seeking relief from the ITC (e.g. In the Matter of Certain Rubber Resins and Processes for Manufacturing Same (Inv. No. 337-TA-849)). For valuable insight on protecting trade secrets and confidential information in China and other Asian countries, including the effective use of non-compete and non-disclosure agreements, please check out our recent webinar titled, “Trade Secret and Non-Compete Considerations in Asia.“
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In a ruling announced a few days ago, Chief Judge Ruben Castillo of the U.S. District Court for the Northern District of Illinois adjudicated the validity of a non-compete clause in an employment agreement where the employee had worked for only 15 months and then resigned and began competing. Notwithstanding the latest word from the Illinois Appellate Court — “Illinois courts have repeatedly held that there must be two years or more of continued employment to constitute adequate consideration in support of a restrictive covenant” (Fifield, 993 N.E.2d 938 (2013)) — Judge Castillo declined to invalidate the covenant for lack of consideration. However, he did dismiss the breach of contract count, finding that the provision’s geographical and activity restrictions were excessive. Montel Aetnastak, Inc. v. Miessen, Case No. 13 C 3801 (N.D. Ill., Jan. 28, 2014) (Castillo, J.).
Summary of the case
Montel, a manufacturer of shelving and storage racks, employed Miessen as its Midwest Regional Sales Manager. In that capacity, she provided highly confidential services to a Montel customer. Her employment agreement contained a provision prohibiting her, for two years after termination of her employment, from engaging in any business substantially related to that of Montel in the United States and Canada. Upon resigning from Montel, Miessen went to work for Bradford, a competitor, and performed similar tasks for the same customer. Montel sued Miessen, Bradford and Bradford’s supplier, alleging common law and statutory violations. The court held that it had jurisdiction over Miessen, denied motions to dismiss several counts, but did dismiss the breach of contract claim and those common law counts pre-empted by the Illinois Trade Secrets Act.
The trade secrets
As a Montel employee, Miessen worked with its design and engineering team and with Montel’s department store customer to meet its specific requirements at one of its many facilities. Montel expected additional orders from the customer. Montel’s designs and pricing were closely guarded secrets. After resigning from Montel, Miessen went to work for Bradford. She became its direct point of contact with that same department store, assisting in reconfiguring Bradford’s products for the customer.
Lawsuit and rulings
Montel filed a seven-count complaint against Miessen, Bradford, and the manufacturer of the products sold by Bradford. Miessen moved to dismiss the complaint against her for lack of personal jurisdiction. All defendants contended that Montel failed to state justiciable claims. Judge Castillo held that Miessen was subject to the court’s jurisdiction. He dismissed some counts but not others.
Enforceability of the non-compete clause
a. Consideration. The defendants argued that, because Miessen worked for Montel for only 15 months, the non-compete covenant failed the Fifield test. Judge Castillo disagreed. He said that some older Illinois appellate court decisions hold that one year is a sufficient period of employment, and that Illinois law does not “provide a clear rule to apply in this instance.” He concluded that given the absence “of a clear direction from the Illinois Supreme Court,” he would employ the “fact-specific approach employed by some Illinois courts.” He held that “the length of her term of employment, along with her voluntary resignation, lead the Court to conclude that she was provided with a ‘substantial period’ of employment. Therefore, [she] was provided with adequate consideration to support the enforceability of the employment agreement.”
b. Geographic and activity restrictions. Judge Castillo found the covenant unenforceable because of “the almost limitless geographic scope of the clause” and the fact that it barred her from working for a competitor, “even if she was employed in a noncompetitive activity.” He noted that there was no severability clause and that the covenant’s deficiencies were such that “a significant modification would be necessary to make it comport with the law.” Accordingly, he declined the defendants’ invitation to “blue pencil” the provision by judicially rewriting it, stating that “extensive judicial reformation of unenforceable post-termination restrictive covenants may be counter to public policy.”
Judge Castillo’s opinion is the first reported judicial critique of Fifield’s “bright line” requirement of a minimum of two years of employment in order to provide adequate consideration for a non-compete covenant. Montel undoubtedly will be cited in litigation brought by Illinois employers endeavoring to enforce agreements against an employee who worked fewer than 24 months. Montel also may be cited by a former employee opposing extensive judicial modification of a covenant unenforceable as written because of virtually unlimited geographic and activity provisions. Of course, a federal judge’s interpretation of Illinois law is not binding in any other case. Only time will tell whether jurists confronted with similar issues find Judge Castillo’s reasoning persuasive.
Employers can enhance the likelihood that a non-compete agreement will be enforced by giving employees some tangible consideration for the covenant. Additionally, it should include reasonable duration, geographic, and activity restrictions. A severability clause also may be appropriate.